United Overseas Bank - CIMB Research 2017-11-03: Healthy NIM And Loan Growth Marred By Bad Loans

UNITED OVERSEAS BANK LTD U11.SI

United Overseas Bank - Healthy NIM And Loan Growth Marred By Bad Loans

UOB's 9M17 net profit of S$2,535m (+8% yoy) was broadly in line with consensus and our expectations, forming 78% of our full-year forecast.
Positives were NIM and loan expansion, slightly marred by elevated non-performing assets (NPA) and specific provisions (SP).
We understand that one last chunky account could turn in 4Q17, but believe that the worst of oil & gas is possibly over, come FY18F.

Maintain Hold with a higher TP as the stock is trading at around mean valuations.
Upside/downside risks hinge on NIM and loan growth.

3Q17 net profit of S$883m (+12% yoy/+5% qoq) formed 27% of our FY17F forecast. UOB achieved 10.5% ROE for the quarter (2Q17: 10.3%, 3Q16: 10.4%), which represented the bank's strongest quarter this year.
The positives for the quarter were NIM and loan expansion, which were slightly marred by elevated NPA formation and higher SP. However, we ask investors not to look in the rear-view mirror. We think that the worst of oil & gas is possibly over, come FY18F.

NII increased 2% yoy to S$830m, driven by NIM and loan expansion. NIM rose 4bp qoq/10bp yoy to 1.79%, due to active balance sheet management and higher yields from interbank balances and securities.
UOB lengthened the duration of its SG govies from three to five years, while asset-mix remained largely the same. Gross loans rose 8% yoy/3% qoq to S$234bn.
After a lacklustre 1H17, 9M17 loan growth stood at 3.7%, and we believe that loan growth will be able to meet our full-year target of c.5%.

Non-NII was 2.5% yoy higher at S$830m. Fees rose 12% yoy/7% qoq on higher wealth management (+40% yoy/+6% qoq) and credit cards (+11% yoy/+3% qoq).
Other non-NII declined 12% yoy due to lower net trading income.
Due to positive jaws, cost-to-income ratio improved 43.5% (2Q17: 45.6%, 3Q16: 45%). We forecast CIR of 45.5% in FY18F.

Specific Provisions (SP) fell S$51m yoy to S$247m. SP as % of gross loans rose qoq to 37bp (2Q17: 30bp; 3Q16: 53bp), due to higher SP from a large account in the O&G sector.
We understand that one last chunky account could turn in 4Q17. Hence, we expect similar NPA formation and SP in 4Q17 (on a qoq basis).
Total credit costs were flat at 32bp with a release in GP made in the past. NPL grew 7% yoy/8% qoq to S$3.75bn, while NPL ratio rose to 1.6% (2Q17: 1.5%; 3Q16: 1.6%). That said, NPL coverage remained strong at 108%.

Boosting our loan growth assumptions and tempering loan loss allowances, we increase our FY17F-19F EPS by 1.9-4.4%.
Our TP also rises (to S$25.40) as we roll-forward our GGM valuation (FY19F ROE of 10.3%, 2.5% LTG, 9.1% COE). This implies 1.18x FY18F P/BV vs. 5-year mean of 1.19x P/BV and 10.9% ROE.
With macro growth on a firmer path, UOB could lag its peers when it comes to NIM expansion, in our view.
The lack of strong non-NII franchise could also haunt. Hold maintained.

YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-11-03

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 25.40 Up 24.280